The year to date has been volatile for companies with streaming strategies central to their business, and recently they have gone from Wall Street darlings to duds.
Each of Redbox Automated Retail LLC, Roku Inc. and Netflix Inc. have seen their stocks pummeled in recent weeks as investors weighed concerns about slowing growth and a pandemic-depleted supply of new movie releases.
The sell-offs came after breakneck growth for Netflix and Roku. The pandemic period drove a boom in new customers for those companies as viewers, quarantined at home and desperate for entertainment, tried streaming for the first time. For the year following March 2020, Netflix shares gained about 46% and Roku shares skyrocketed 243%.
Redbox hoped to ride the bullish sentiment for streaming platforms as it entered the public markets and promised to pivot its physical DVD-kiosk business to a streaming model.
But stock movement for all three companies turned negative in recent weeks. Redbox shares, which listed through a special purpose acquisition company-related reverse merger in October, have cratered 23.1% from Nov. 1 to Dec. 9. For that same period, Roku shares traded off 16.0%, and Netflix shares dropped 9.4%
Growing competition
Each of those companies is trading on unique dynamics and valuations, but they are all facing tough competition for entertainment hours with the proliferation of streaming platforms from Walt Disney Co., AT&T Inc. and Apple Inc., among other well-funded conglomerates.
"While we had not expected this many large peers (Disney, Comcast, Amazon, Viacom/CBS, Warner Discovery and Apple) to jump in, the fact is that they are all in the streaming business to win," Wedbush analyst Michael Pachter said in a note. "At the same time, each is competing for new content, driving the price for new content ever higher."
That dynamic, along with compressed subscriber growth, has weighed on Netflix in particular. Netflix's pandemic-period boom in membership growth only seemed to pull demand forward, making it difficult for the company to maintain growth against new competition and beat expectations in more recent quarters.
Still in the Redbox
Unlike Netflix, Roku and Redbox are attempting to harness some of the income going to third-party streamers. Like Amazon.com Inc.'s Prime platform, Roku offers a bundling service that makes subscriptions and login to third-party apps available on its platform, for which it takes a royalty fee.
Redbox plans to offer the same product in 2022. Like Roku, Redbox's streaming strategy includes pay-per-view premium streams and ad-supported linear digital TV, and both companies have legacy physical businesses, with Redbox's focused on kiosks and Roku's focused on connected TVs.
During the pandemic, analysts applauded the companies' diverse strategies. However, financial results do not seem to be in line with prior bullishness. Redbox for the first nine months of 2021 reported revenue at $216.4 million, down 53.5% year over year, casting doubt on its ability to reach its $569 million revenue guidance for the full year.
Redbox's miss was largely tied to the fact that studios are still producing a low volume of new content that Redbox customers can rent, B. Riley Securities analyst Eric Wold said.
"We understand that studios have been holding physical release plans very close to their vests — which has made it extremely difficult for RDBX management to effectively plan around kiosk availability and marketing campaigns to drive traffic to the kiosks. We continue to expect this to begin to improve further in early 2022," Wold said in a Nov. 30 note.
Roku debate
Meanwhile, Roku saw third-quarter revenue climb, up 68.3% compared to the same period in 2020, but it also registered deceleration in key metrics.
Roku in the third quarter reported 56.4 million active accounts, compared to consensus of 56.7 million. Perhaps more troubling for investors, Roku guided for fourth-quarter total revenue of $893 million, well below consensus of $946 million and potentially reflecting a continued slowdown on usage, according to Truist Securities analyst Matthew Thornton.
The results caused Wall Street to turn on Roku's stock, even though Thornton and other analysts remained bullish. Thornton maintained his "buy" rating on the stock, and Pachter from Wedbush maintained an "outperform" rating.
"Investors clearly view the slowdown in active accounts in Q3 and what is suggested by Q4 guidance as concerning, as we largely exit lockdowns and spend more time out of the home. However, we think this slowdown is temporary," Pachter said in a note on Roku's earnings.
Not all analysts were convinced, however.
"When a stock goes up on a series of strong and better than expected results, few probing questions are ever asked as the outperformance is usually a confirmation of an investment thesis," MoffettNathanson analyst Michael Nathanson said in a note following Roku's third-quarter results. "However, over the past few months, we have started to question that thesis and the core assumptions in our model."
Nathanson downgraded Roku to "sell."
